Wednesday 6 April 2011 19.26 EDT
First published on Wednesday 6 April 2011 19.26 EDT

Portugal has joined Greece and Ireland on the casualty list of Europe's sovereign debtors after its prime minister, José Sócrates, requested a European Union bailout.

The dramatic decision came in the middle of a political crisis that has left the country in limbo and with spiralling interest rates on its debt.

"I want to inform the Portuguese that the government decided today to ask ... for financial help, to ensure financing for our country, for our financial system and for our economy," Sócrates said in a televised address. "This is an especially grave moment for our country," he added. "Things will only get worse if nothing's done."

Sócrates said that the bailout, which analysts said could be between €70bn (£61bn) and €80bn was "the last resort".

The move was immediately welcomed in Brussels. "This is a responsible move by the Portuguese government for the sake of economic stability in the country and in Europe," the European commission's economic and monetary affairs commissioner, Olli Rehn, told Reuters.

Sócrates did not say how much aid Portugal had asked for, but promised to negotiate the best possible conditions.

Analysts said Portugal was expected to need up to €80bn, an amount the EU's bailout fund, the European financial stability facility, can easily cover. The European commission's president, José Manuel Barroso, promised a swift response.

Portugal's troubles differ from Ireland, which pledged to cover huge losses at its banks, and Greece, which lied about its debt. Instead, it had allowed debt to mushroom during a decade in which its economy grew at just 0.7% a year.

The yield or interest on Portugal's 10-year bonds, which stood at 5.8% a year ago, was at 8.54% on Wednesday.

Economists had said that anything over 7% was too high for Portugal, which has growing unemployment and is predicted to enter a double-dip recession this year.

Ratings agencies had downgraded Portugal's bonds to a notch above junk level and even its own bankers warned they could not keep buying national debt as they tussled with liquidity problems of their own.

The caretaker government immediately blamed opposition parties for rejecting an austerity package on 23 March, bringing Sócrates's socialist government down and forcing 5 June elections. It came on top of three earlier packages of cuts and tax hikes.

"The country was irresponsibly pushed into a difficult situation in the financial markets," Portugal's finance minister, Fernando Teixeira dos Santos, told the Jornal de Negócios shortly before the announcement.

The call for help comes from a weak caretaker government which may hand over the reins of the country to a minority centre-right government led by the Social Democrats after the elections.

Teixeira dos Santos said that other political parties would have to fall into line with the bailout request. "Faced with a difficult situation that could have been avoided, I believe it is necessary to use the financial mechanisms that are available in Europe within the terms of the current political situation," he said. "That will need, as well, the involvement and compromise of the main political forces and institutions in the country."

Social democrat leader Pedro Passos Coelho said his party supported the aid request. "This needs to be seen as the first step in not hiding the truth," he said.

The government had admitted earlier on Wednesday that the political crisis was causing "irreparable damage" as borrowing costs rocketed.

Portugal sold a billion euros in short-term debt yesterday but saw the yield on 6-month and 12-month bills hit spikes of over 5%.

Portugal admitted last week that the 2010 budget deficit had been 8.6 percent of gross domestic product, far above its 7.3 percent target.

The caretaker government still claimed this year's goal of 4.6% would be met.

As Portugal became the third eurozone domino to fall, attention was expected to switch to Spain, though it has seen its debt yields improve recently as austerity measures bring down its deficit and growth returns.

International Monetary Fund boss Dominique Strauss-Kahn told El País newspaper yesterday that Spain - a far larger and more important economy - was safe from a bail-out.